Rondot Automotive Case Study

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Background:

Rondot Automotive is a global leader in the design and production of advanced automotive electrical products. Its Jackson, Mississippi plant produces approximately 7 million motors per year, supplying some of the best known car manufacturers in the world today. Rondot’s purchasing organization operates as a hybrid structure comprised of a strategic purchasing group located at its head office, and a plant purchasing department. Due to increasing global competition and demands from its customers for price reductions, plant management has been under pressure to reduce operating costs. To achieve cost savings, Glenn Northcott, purchasing manager at the plant has been evaluating the feasibility of changing its current wet based painting system and outsourcing it to Grevin E-Coating. Rondot’s painting system is necessary to paint the steel housing components for its 6 families of housing for the motors it manufactures. Currently, it costs Rondot $0.25 cents per unit to paint these 6 families of housing. Grevin’s product, which utilizes a newer and more advanced technology would cost $0.15 per unit. Tests using Grevin’s system showed that five families of housing could be converted to its system. These five families utilized a hot bond adhesion process as part of the manufacturing process. The one family of housing which could not be converted however, used a cold bond adhesion process. As part of his analysis, Glenn solicited opinions from John Underwood, the plant manufacturing engineer and Betty McKinley from production planning. John supported changing over to Grevin because the current painting system is expensive, inefficient and would eventually need to be upgraded. Betty estimated that the plant would need to add an additional two weeks’ worth of inventory if painting was outsourced to Grevin, adding 3 cents per part for transportation and packaging. Upon completing his evaluation, Glenn has to meet with is boss Terry Gibson and plant manager Dick Taylor to discuss his evaluation and make recommendations as to what action needs to be taken.

Key Issues:

• Acute: Glen needs to complete his assessment in time to present his analysis and recommendations regarding the merits of outsourcing to Grevin to Terry and Dick.

• Chronic: Rondot is faced with a number of long term issues stemming from increased competition. Severe global competition has resulted in a decline in sales, a loss in market share market share, a drop in the number of employees and pressure to lower costs to stay competitive.

Analysis:

According to the following calculations, Rondot can experience immediate cost savings of $29,400 annually by outsourcing its painting operations to Grevin:

Current Cost – Wet based paint system

$0.25 per unit * 700,000 units = Total of $175,000

Cost of outsourcing to Grevin E-Coating (60% capacity)

$0.18 ($.015+$0.3 additional inventory cost) per unit*420,000 units (60% of capacity) = $75,600

+ $0.25 per unit*280,000 units (remaining 40% of capacity) = $70,000

= Total of $145,600

$175,000 - $145,600 = $29,400